Cutting Back


Yesterday, as I was talking to an economist about something, he explained that some research he had done had demonstrated a particular small effect.  “It really only affected things at the margin,” he said.

“OK,” I asked, “But doesn’t everything work at the margin?”  He sort of laughed.  “Are you an economist?  That’s how economists talk.”

Nope, not me.  I just quote ’em on my blog.  Still, that seems to be the best explanation for this story in the Washington Post today:

Denise Kimberlin and her husband, Craig, of Woodbridge are government contractors who make nice livings. They recently got raises. They don’t fear losing their jobs.

Yet, something is driving them to change their spending habits. They have cut back by at least $250 a week on clothes, dinners out and other discretionary spending.

….Economists say many still-flush consumers are handcuffed by psychological traps that cause them to tighten their purse strings even though economic hardship is not their reality….Psychologists explain that people fall prey to what is known as social proof. The most famous study pointing at the effect was done in the 1960s by psychologist Stanley Milgram. He had one or two people stand on a busy city block in New York and stare up at a sixth-floor building window. Most pedestrians ignored them. But when he had 15 people stand and stare at the window, nearly everyone walking down the street looked up at it, too.

I guess that might be the explanation.  But here’s another one: when there’s massive, objective evidence of a huge recession and rising unemployment, even people with good jobs act to cut their spending on the margin.  Why?  Because they also fear bad news on the margin.  The Kimberlins might not be afraid of losing their jobs, but I wouldn’t be surprised if they’re, maybe, 1% afraid of losing their jobs.  Or 5% afraid of getting a pay cut.  Or 10% afraid that their bank will raise the rate on their credit card debt.  Or 90% afraid that they can’t use their home as an ATM machine anymore.  So they’re cutting back spending a little bit, right in line with that limited amount of fear.  Social cues might have something to do with this, but surely a rational response to tangible, predictible outside events has even more to do with it?

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